We experimentally examine determinants of the transferability and durability of an assurer's flagship-service reputation for competence in a multi-service context. Economic and psychology theories agree that transferability will increase when a new service and a flagship service require relatively similar, as opposed to relatively dissimilar, competencies. These theories disagree, however, regarding the durability of an assurer's flagship-service reputation following a performance failure in a new service. Economic theory requires some reciprocity for transferability and durability, and, accordingly, predicts that a new-service failure will inflict more damage on a flagship-service reputation when the new and flagship services require relatively similar, as opposed to relatively dissimilar, competencies. Psychology theory, in contrast, predicts that a new-service failure will tend not to damage the flagship-service reputation, even when the new and flagship services require relatively similar competencies. Thus, unlike economic theory, psychology theory predicts that relatively similar competencies between a new and a flagship service can improve the transferability of an assurer's flagship-service reputation for competence without reciprocally threatening its durability. Experimental findings indicate that reputation transferability increases when the new and flagship services require relatively similar, as opposed to relatively dissimilar, competencies. They also indicate that a new-service failure damages the flagship-service reputation only when, and to a greater degree when, the new and flagship services require relatively dissimilar, as opposed to relatively similar, competencies. Thus, empirically, greater similarity in the competencies required by a new and flagship service simultaneously enhances the transferability and durability of the assurer's flagship-service reputation. These empirical findings are better explained by psychology theory than by economic theory.

Abstract We investigate whether the financial riskiness of large U.S. audit firm clienteles varied with the changing audit litigation liability environment during the period 1975‐99. Partitioning the period of study into four distinct periods (a benchmark period (1975‐84), a period of increasing concerns about litigation liability (1985‐89), a period of lobbying for reform (1990‐94), and a post‐relief period (1995‐99)), we find some evidence of risk decreases during 1985‐89, strong evidence of risk decreases during 1990‐94, and strong evidence of risk increases during 1995‐99. However, we also find that over the period of our study, a time during which Big 6 market shares grew appreciably, the proportion of litigious‐industry clients in Big 6 client portfolios grew at about the same rate as the proportion of such clients in the population. Moreover, the Big 6 share of the financially riskiest clients in the economy did not grow as fast as the overall Big 6 market share. In sum, although our evidence is consistent with the hypothesis that the riskiness of Big 6 client portfolios responded to changes in the audit litigation liability environment, we find no systematic evidence of a "race to the bottom" or "bottom fishing" by these firms in a bid to increase their market shares.